You need more than a great idea to fly solo-here's what's involved.
Psst...C'mon. Admit it. If you're not already
operating on your own, you've thought about leaving the nest and making
the leap. Maybe more than once. Many have taken the leap, of course,
and succeeded. But be forewarned: It ain't easy, and if you don't have
a plan, a business model to follow, along with adequate funding to get
started and the necessary wherewithal to withstand the ups and downs,
it could be your road to perdition.
Why? Because it's easy to underestimate the length of time and procedures involved. And the expenses can be another eye opener.
"It's much more costly than you think. I realized early on the load that used to be shared by others was now on my shoulders," says advisor Ricky Grunden of Denton, Texas, who started out solo in 2001. "You look around and think I can do all this by myself, without realizing the weight of business planning, cost and execution to get it all accomplished."
There are many different variables to consider: funding, setting up compliance requirements, drafting engagement agreements, and marketing costs. Should you rent, lease office space, or work out of your home? Another consideration is the time and cost of staffing and benefits if you decide to expand your practice.
Initially the key issues to be decided are what form of practice your business will take, what markets you plan to serve, and what your ultimate business model will look like. Some may prefer the lone wolf or solo model, while others will want to build a firm. The amount and type of expenses will vary depending on where you want to head with your plan.
There are also stages of development. Initially you may be able to operate well enough doing all the tasks manually yourself. But then you may grow to the point of needing to delegate and automate, at which point expenses tend to increase in lumps, as you have to hire staff and invest in systems.
So what does it take? Can anyone do it? How much does it all cost?
Four advisors who made the leap weighed in with their experiences: Grunden; Delia Fernandez of Los Alamitos, Calif.; Bryan E. Kelly of Bel Air, Md.; and Elise Stevenson of Milton, Mass., on her own just a few months.
All four advisors had a variety of motives for taking the plunge. Fernandez, who manages $20 million today and whose model was to become a fee-only practitioner, opened her own shop by default about ten years ago after she was laid off from a corporate public relations job and failed to find a slot with a fee-only planner. Fortunately she was well prepared, having done an internship with planner Laura Tarbox in Newport Beach, Calif., and completed her personal financial planning certificate at U.C. Irvine Extension.
"I really do love the freedom and control of being self-employed," says Fernandez. "But I'm so security conscious that had I not been laid off from a corporate job I never would have gone out on my own. Basically, I had to be kicked out of working for someone else to take this step."
Grunden in 2001 left a successful partnership in North Dallas after 15 years and moved back to his hometown, fast-growing Denton, to set up a practice. His model, and what he has become, is a fee-only planner, managing a firm with $47 million AUM and a clientele consisting of executives from technology and energy companies and small business owners.
Like Grunden, both Kelly and Stevenson are fee-only planners who had experience elsewhere and wanted a change. Not happy in the branch system at Fidelity Investments, Kelly left in 1997. He also moved back to his hometown, where his aim is to be the go-to guy for financial planning services.
Just out on her own since July, Stevenson, whose target market is individuals with assets between $1 million to $5 million, says she wanted more control over client engagements and more flexibility in her schedule. "I had been working for a financial planning practice within a medium-sized accounting firm, but felt the different ways of doing business were not compatible. Also, I had built up eight years of experience and a stable of clients who I was confident would go with me. I wasn't starting from scratch."
The method of financing a start-up advisory can take many forms. Interestingly, these four advisors did it mostly through savings, though in addition Fernandez tapped equity in her home and Grunden took out a bank loan to outfit his office and purchase marketing materials.
Grunden, who appears to have spent the most and has a no-debt philosophy in both his personal life and business, had an initial out-of-pocket start-up expense of $60,000. This went for legal fees involved in separating from the partnership, retaining an architect and interior design fees, and regulatory licensing. It also went for computer hardware, portfolio management software, printers, telephone systems and office furnishings. Another $40,000, he says, went towards building out the new office space with the goal of classic elegance, which complemented his clients' tastes. Additional expenses of $20,000 one year later went for imaging packaging costs-Web site content, brochure design and printing. Included was $6,000 the firm paid for hiring a marketing consultant for brand positioning and logo design.
"Our prior do-it-yourself materials simply embarrassed us," says Grunden. "I often hesitated to give out my business card."
Kelly, whose firm manages $85 million, got started with the help of savings and a $30,000 bank loan amortized over seven years. These funds went for office furniture, computer systems, outfitting and decorating an office, and seminar marketing materials.
"That's about as far as $30,000 goes," says Kelly. "It doesn't seem like a lot, but when you put all the components (of starting a business) together, it adds up to a substantial sum." He recalls with dread, for example, buying a copier at the beginning. "It was $3,000-used."
Fernandez figures she spent about $15,000 the first
year on software programs, data subscriptions, professional
associations, and meetings, conferences and online service. The biggest
adjustment, she says, was replacing a corporate environment and dealing
with all the technical problems of buying and installing computers and
One cost Fernandez didn't anticipate but now understands is paper and ink. "There's no such thing as a paperless office," she avers. "I buy stationery plus really good inkjet paper for color copies for client presentations, then regular paper for drafts. With my client load, I must spend $100 a month on these kinds of supplies."
Another decision solo practitioners face starting out is whether to rent, lease or work from home. Mainly it's an issue of how you plan to manage growth, or whether you remain a solo practitioner. When you're first starting out, working from home, like Stevenson, can save on renting office space. Even so, she estimates her total start-up costs at $22,000.
Fernandez says she worked from home her first three years, later shared space with two other small businesses and now leases, paying $1,200 monthly for 818 square feet. At the outset she bought used furniture, but splurged for a desk and hutch ($4,700) where she works and meets clients. Kelly, on the other hand, opted eventually to own. "Our first office was in an old house in town that had been converted into office space. We rented four rooms for $1,100 a month, and it went up from there. Today, we own our own building."
You also have to decide whether to be your own RIA or affiliate with an independent broker-dealer. This decision can be influenced in the beginning by the model of practice you intend to follow. It often can be key, from an expense standpoint, in that if you become your own independent RIA you may have more up-front costs, versus that of affiliating with an independent broker-dealer, which has costs over time but little up front.
It's easy to underestimate the time involved in getting regulatory procedures completed. Each state has a different approval process. "I was lucky. It only took me a couple of weeks in Massachusetts," says Stevenson, who went the RIA route.
She hired another firm to prepare and file her ADV and draft client agreements ($5,000 initially and at least $2,000 a year ongoing); Grunden had a tax attorney handle all his compliance requirements as a personal favor.
Kelly decided to affiliate with an independent broker-dealer, Cambridge Investment Inc. "It helped us greatly in supplying needed contracts as well as compliance management contracts," he says. It also "eliminated the cost of developing our own contracts with counsel and compliance management."
Fernandez drafted her own compliance documents after soliciting sample ADVs and client agreement letters from a network of planners. "I probably spent 20 hours in all," she says. "It's really important to have a network of planners, if you've established a network, or hire someone who can get it done right the first time."
As your business grows another issue you face is hiring staff. Not only do you have to pay direct compensation but their benefits, which include payroll taxes, unemployment, insurance, worker's compensation and possibly 401 (k) contributions.
Kelly waited for revenues to flow in before hiring, and then hired a part-timer for filing and paperwork. "That lasted about two years. Then we hired our first full-time assistant, and a year later another," says Kelly. "We're a paperless office and depend heavily on technology to provide efficient services to our clients."
"This helped us greatly in keeping our overhead down, which has kept our profit margin at 55% or 60%. In turn, this has allowed us to hold onto our employees without a lot of turnover by compensating them above market."
At the outset, Grunden had good client support with a personal assistant and an office manager-portfolio trader. However, that left him handling all marketing, investment management decisions, financial planning and updates, and meeting with clients.